ECN 104 Final Notes with
Complete Solutions
2024/2025 Latest Update
When does a excise tax fall mainly on producers? - Answer- when the price elasticity of
demand is higher than elasticity of supply
When does a excise tax fall mainly on consumers? - Answer- when the price elasticity
of supply is higher than the price elasticity of demand
Will doubling the excise tax rate on a good or service double the amount of revenue
collected? - Answer- no, because the tax increase will reduce the quantity of the good
or service transacted
Deadweight loss caused by the tax - Answer- represents the total surplus lost to society
because of the tax
Administrative costs of a tax - Answer- the resources used by government to collect the
tax, and by taxpayers to pay it, over and above the amount of the tax, as well as to
evade it
Total inefficiency caused by a tax - Answer- the sum of its deadweight loss and its
administrative costs
How to minimize the efficiency costs of taxation - Answer- one should choose to tax
only those goods for which demand or supply, or both is relatively inelastic
When does tax impose no deadweight loss - Answer- when demand is perfectly
inelastic or supply is perfectly inelastic
tax fairness - Answer- benefits principle
ability-to-pay principle
benefits principle - Answer- those who benefit from public spending should bear the
burden of the tax that pays for that spending
, ability-to-pay principle - Answer- those with greater ability to pay a tax should pay more
tax
lump-sum tax (poll tax) - Answer- an efficient but unfair tax where tax is the same for
everyone, regardless of any actions people take
trade-off between equity and efficiency - Answer- the system can be made more
efficient only by making it less fair and vice versa. In a well-designed tax system
tax base - Answer- the value of assets on which tax can be imposed e.g. income
tax structure - Answer- specifies how the tax rates depend on the tax base
income tax - Answer- a tax that depends on the income of an individual or a family from
wages and investments
payroll tax - Answer- a tax that depends on the earnings an employer pays to an
employee
sales tax - Answer- a tax that depends on the value of goods sold
profits tax - Answer- a tax that depends on a firm's profits
property tax - Answer- a tax that depends on the value of property (value of a home)
proportional tax - Answer- the tax rate is fixed, regardless of the taxpayer's income or
wealth
progressive tax - Answer- the tax rate increased with income. it takes a larger share of
the income of high-income taxpayers than of low-income taxpayers
regressive tax - Answer- the tax rate decreases with income. it takes a smaller share of
the income of high-income taxpayers than of low-income taxpayers
marginal tax rate - Answer- the percentage of an increase in income that is taxed away
utility of a consumer - Answer- a measure of satisfaction the consumer derives from the
consumption of goods and services
utility function - Answer- gives the total utility generated by his or her consumption
bundle
Excise Tax - Answer- a per-unit tax on sales of a good or service
Effects of excise taxes on prices and quantities - Answer- -raise the price paid by
buyers
Complete Solutions
2024/2025 Latest Update
When does a excise tax fall mainly on producers? - Answer- when the price elasticity of
demand is higher than elasticity of supply
When does a excise tax fall mainly on consumers? - Answer- when the price elasticity
of supply is higher than the price elasticity of demand
Will doubling the excise tax rate on a good or service double the amount of revenue
collected? - Answer- no, because the tax increase will reduce the quantity of the good
or service transacted
Deadweight loss caused by the tax - Answer- represents the total surplus lost to society
because of the tax
Administrative costs of a tax - Answer- the resources used by government to collect the
tax, and by taxpayers to pay it, over and above the amount of the tax, as well as to
evade it
Total inefficiency caused by a tax - Answer- the sum of its deadweight loss and its
administrative costs
How to minimize the efficiency costs of taxation - Answer- one should choose to tax
only those goods for which demand or supply, or both is relatively inelastic
When does tax impose no deadweight loss - Answer- when demand is perfectly
inelastic or supply is perfectly inelastic
tax fairness - Answer- benefits principle
ability-to-pay principle
benefits principle - Answer- those who benefit from public spending should bear the
burden of the tax that pays for that spending
, ability-to-pay principle - Answer- those with greater ability to pay a tax should pay more
tax
lump-sum tax (poll tax) - Answer- an efficient but unfair tax where tax is the same for
everyone, regardless of any actions people take
trade-off between equity and efficiency - Answer- the system can be made more
efficient only by making it less fair and vice versa. In a well-designed tax system
tax base - Answer- the value of assets on which tax can be imposed e.g. income
tax structure - Answer- specifies how the tax rates depend on the tax base
income tax - Answer- a tax that depends on the income of an individual or a family from
wages and investments
payroll tax - Answer- a tax that depends on the earnings an employer pays to an
employee
sales tax - Answer- a tax that depends on the value of goods sold
profits tax - Answer- a tax that depends on a firm's profits
property tax - Answer- a tax that depends on the value of property (value of a home)
proportional tax - Answer- the tax rate is fixed, regardless of the taxpayer's income or
wealth
progressive tax - Answer- the tax rate increased with income. it takes a larger share of
the income of high-income taxpayers than of low-income taxpayers
regressive tax - Answer- the tax rate decreases with income. it takes a smaller share of
the income of high-income taxpayers than of low-income taxpayers
marginal tax rate - Answer- the percentage of an increase in income that is taxed away
utility of a consumer - Answer- a measure of satisfaction the consumer derives from the
consumption of goods and services
utility function - Answer- gives the total utility generated by his or her consumption
bundle
Excise Tax - Answer- a per-unit tax on sales of a good or service
Effects of excise taxes on prices and quantities - Answer- -raise the price paid by
buyers
